Lenders to tighten vigil on highway project costs

After facing flak for “over-financing“ of highway projects, banks and financial institutions won't accept the total project cost (TPC) estimated by private developers, if it is more than 20-25% of the cost worked out by the government.Dipak K Dash | TNN | September 08, 2015, 08:42 IST

Stalled highway projects worth Rs 27K cr gets a fresh lease of life, with SC ruling that requisite environmental approvals may be delinked from forest clearances.NEW DELHI: After facing flak for “over-financing“ of highway projects, banks and financial institutions won't accept the total project cost (TPC) estimated by private developers, if it is more than 20-25 percent of the cost worked out by the government.

Inflated project cost has been the biggest problem for financial institutions in terms of over-exposure to projects. On the other hand, it worked as an advantage for private players as it enabled them to take higher loans on the basis of inflated project costs. In several cases, higher amount of loans helped them avoid putting required equity on their part to start the project.

In the highway sector, developers are required to infuse a minimum of 30 percent of equity as only 70 percent of the project cost can be accesses through loans.“But, they hardly followed this.Developers started work without investing anything and they were not worried, if the projects were stuck. So, today the biggest sufferers are banks and lenders, who face the risk of losing their investments,“ said a senior NHAI official.

However, developers say the government-estimated project cost is often conservative and there is escalation in the cost by the time the bidding takes place. The issue of over-financing was discussed at a meeting chaired by road transport and highways minister Nitin Gadkari on Monday , which was attended by top banks and lenders like SBI and IDFC. Sources said the ministry officials made a presentation on the huge gap between the government approved project cost and quoted by the developers to bankers.

“Bank representatives said they will be more vigilant and won't accept the project costs, which are more than 20-25% of our estimates. They said there is scope for little escalation since they feel our costing is slightly conservative and developers need to spend more. This logic is acceptable,“ said a highway ministry official.

Responding to issues raised by bankers that non-availability of land delaying the projects, Gadkari reportedly observed that banks should not have closed the deal for financing when they knew that only 20-30 percent of required land was available.

In fact, segment leaders like Maruti Suzuki, Tata Motors and Hero MotoCorp have reported de-growth of 34.3 per cent, 45 per cent and 20 per cent, respectively giving a clear indication of a prolonged slowdown in the sector.